Beyond Nuclear Fact Sheet

Beyond Nuclear White Paper Nuclear Power’s Toxic Assets: Wall Street’s View “We aren’t going to build a nuclear plant anytime soon. Standard & Poor’s and Moody’s would have a heart attack. And my chief financial officer would, too.”1 Thomas Capps, CEO, Dominion Nuclear, May 2, 2005 “Every one of these companies is going through a massive gut check.”2 John Gilbertson, financial analyst, Goldman Sachs, November 20, 2008 “Moody’s is considering taking a more negative view for those issuers seeking to build new nuclear power plants.” 3 Moody’s Special Comment, Infrastructure Finance, June 25, 2009 Federal loan guarantees: Congress to rush in where bankers fear to tread? Investments in new nuclear power plants have long been recognized as bad apples that can spoil the credit rating for any electric power company that ventures into new reactor construction projects. Now, Congress wants to make the federal taxpayer the primary lender of tens, maybe hundreds of billions of dollars for new reactor projects that carry a very high risk of default on the loans. The 2008 financial “meltdown” of the most venerable institutions on Wall Street and a deepening global recession has amplified the known risks accompanying financial commitments to ever skyrocketing costs associated with building more nuclear reactors. The atomic power industry is a notoriously risky financial venture well known even before the current global economic crisis. Hundreds of billions of dollars in federal loan guarantees and taxpayer subsidies would now be needed to finance a resurgence of reactor construction here in the United States. In fact, Wall Street is more wary of new nuclear power plants, not less, despite Congressional passage of incentive packages, loan guarantees and increased financial protections for the industry. The Energy Policy Act of 2005 (EPACT) gave $13 billion to the nuclear industry in production tax credits, construction “risk insurance” and extended limited liability coverage to incentivize financial investment in new reactor construction.4 Then in 2007, Congress handed over an additional $20.5 billion in federal loan guarantees making U.S. taxpayers the co-signers on loans that Wall Street still refused to risk.5 These energy policy carrots have prompted a bow wave of construction and operating licenses new reactor construction applications to the Nuclear Regulatory Commission6. 1 Over the past several years with mounting industry lobbying efforts for more federal loan guarantees and outright federal subsidies for new reactor construction and operations, Wall Street has authored several clearly worded and freshly painted warning signs in a series of analytical reports that detail the many unaddressed economic pitfalls that await new construction projects and their investors whether they be financial institutions, utility ratepayers and federal taxpayers alike. Nuclear power’s historic financial failure soured Wall Street on new investments The New York Stock Exchange on Wall Street has been viewed as the symbolic and financial seat of corporate power in the United States of America. The first era of nuclear power plant construction was funded largely by multi-national corporations listed on the stock exchange. Much of the capital for these nuclear projects was raised through the issuance of stocks and bonds underwritten by investment banks and issued through their brokerage firms like Merrill Lynch. These investment firms and bankers assumed partial or total financial risk in the sale of stock to investors contrary to what many might think were by made up in bulk by ordinary citizens, were mostly controlled by corporations, banks, insurance companies, pension funds and foundations. While Wall Street remain’s cautiously “bullish” on new nuclear power, they are acutely aware of the large “bear” that stalks the financial prospects for an expansion of atomic power. Wall Street’s deep skepticism of a so-called “nuclear renaissance” is well founded given the history of unpredictable construction costs, undependable licensing schedules, uncertain project completion times and operational risks once completed. All of these factors remain part of a still dubious formula for a potential repeat of the financial failure now so closely associated with past nuclear power plant construction investment. In fact, stock and bond options for new reactor construction are not possible today, hence the need for federal loan guarantees issued through Congress. The financing practices that backed the first era of atomic power were hard hit when abandoned construction projects and completion cost ran on average 200% more than projected, tripling the original projected estimates.7 In fact, the first era of licensing and construction of nuclear power stations became notorious when Forbes magazine described it as “the failure of the nuclear power program which ranks as the largest managerial disaster in business history, a disaster of monumental scale.”8 What started in 1974 with President Nixon’s call for “Project Independence” and 1000 nuclear power stations in the United States by 2000 ended in nearly as many costly cancellations as completed projects. Of the 253 reactor units eventually ordered by U.S. electric utilities, the last order being placed in 1978, 71 units were cancelled before construction began. Between the United States Atomic Energy Commission and its successor, the Nuclear Regulatory Commission, the federal regulator received 182 construction permits of which 50 units 2 were abandoned in construction with billions of dollars in investment. Only 132 units were licensed, built and operated. Of that number, 28 units have permanently closed in the United States before their 40-year license expired including the two partial core meltdown accidents at Fermi 1 and Three Mile Island Unit 2. Only 104 units are operational nationwide today.9 The near collapse of the nuclear industry in the 1980s has left the investment industry unwilling to sink more private capital into new reactor construction for the 21st Century. New nuclear construction is an increasingly risky investment In a 2006 corporate finance report, Standard & Poor’s performed a comparative analysis of nuclear power development in the United States, Canada and Europe. Chief among their findings was that new reactor construction will come at significant corporate financial risk. “In general, nuclear plant ownership tends to be less supportive of credit quality because it introduces added levels of operating, regulatory, and environmental risk to a business profile.”10 “Standard & Poor’s sees nuclear generation generally to have the highest overall business risk compared with other types of generation.”11 “One common theme shared by the North American and European nuclear industries is the concentration of ownership. All three regions exhibit a high ownership concentration. This has not yet hindered credit quality, but too-large a critical mass could cause diminishing economies of scale and may negatively affect credit.”12 In a subsequent special report on corporate finance published in October 2007, Moody’s Corporate Finance said: “In general, Moody’s maintains a favorable bias towards nuclear generation.”13 “In our opinion, if federal and state governments are serious about reducing carbon emissions, new nuclear power will be part of the solution.”14 However, “From a credit perspective, business and operating risk profiles will increase for companies that pursue new nuclear generation.”15 “This increase in risk is attributable to the size and complexity of the project, the long term nature of the construction cycle and the uncertainties associated with all-in costs, regulatory oversight and ultimate rate impact to end use consumers and the ability for a utility to recover costs and earn an appropriate return.”16 3 The term “all-in costs” is short hand for all included costs over the many years of a construction project including design and architecture, licensing, land, interest payments for financing, materials, labor and cost escalations due to delays, inflation and construction cost overruns. This all-in estimate is contrasted by what industry typically presents as the “overnight cost”---as if you could build a massive nuclear project in a single day without the risk of cost escalations or mounting finance charges. These costs are a part of the “life cycle costs” that include a full range of cost of the nuclear fuel chain from uranium mining and it’s real clean up costs to the long-term management cost of nuclear waste for the millennia after the last watt of nuclear energy is generated at the reactor. “From a credit perspective, utilities that pursue the new nuclear generation option will be ascribed a higher relative business and operating risk profile, which may pressure credit ratings over the intermediate to longer term horizon.”17 The uncertainty of these “all in” costs brings increasing risk to the credit quality of the builder. As Moody’s points out, “A utility that builds a new nuclear power plant may experience an approximately 25%-30% deterioration in cash-flow-related-credit metrics, effectively reducing the ratio of cash flow from operations as a percentage of debt from roughly 25% to the mid teens range.”18 Given the bleak economic outlook for a prolonged global recession, the projections for a nuclear expansion are likely to decline due in large part to unpredictable all-in costs and credit crisis. As one Wall Street analyst was quoted in November 2008, “The global downturn means that many utility companies will be ‘pressing the pause button’ on new nuclear plans, says John Gilbertson, who tracks financing for nuclear projects as managing director for New York-based brokerage firm Goldman Sachs.”19 In fact, US nuclear utility companies may not be far off from credit quality impacts and announcing the postponement or cancellation of projects like has happened in the South Africa state owned electric utility where ambitious plans to build AREVA and Westinghouse pressurized reactors were cancelled in part to keep its electricity competitively priced.

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